Undeterred by the many warnings of an increasing financial vulnerability, Canadians seem to be piling on more debt. A report from the Parliamentary Budget Office (PBO) says, households owed $174 for every $100 in disposable income in the first quarter of the year. This is taking household financial vulnerability into uncharted territory, according to the PBO. The indebtedness ratio “increased sharply over 2002 to 2011” before evening out at about 170 per cent in early 2015, but then started rising again. The budget watchdog expects household indebtedness to hit 180 per cent by the end of 2018.
The debt service ratio is used to measure how vulnerable households are to economic shocks like unemployment or interest rate hikes.
In the first quarter of this year, Canadian households owed $14.20 in principal-and-interest payments on debt for every $100 in disposable income, according to the Parliamentary Budget Office. That number has increased slightly from mid-2015, and is projected to increase further with the PBO expecting it to hit $16.30 per $100 by the end of 2021.
Not surprising was the real estate connection. The PBO expects household indebtedness to increase due to continued gains in real house prices and elevated levels of consumer confidence despite a projected rise in interest rates.
In keeping with previous warnings, the report projects that ability Canadian households to service their debt will become stretched even further with interest rates expected rise to more ‘normal’ levels over the next five years.
Based on PBO’s latest projection, the financial vulnerability of the average Canadian household would rise to levels beyond historical experience. – CINEWS